Part 1 Deception and Abuse at the Fed...Hitting a Tank with a Stick ...

Deception and Abuse at the Fed

by Robert Auerbach

Chapter 1 

Hitting a Tank with a Stick 

The Combative Henry B.

The amazing 1990s began with a recession, high unemployment, and victory in the first Gulf War. Soon, though, the economic good times rolled, as the promise of remarkable computer and Internet technologies was realized. The economy grew, unemployment dropped, the federal deficit changed to a rising surplus, and jubilant investors hung on to the stock market balloon that rapidly inflated until the end of the decade. The spotlight focused on one man, who was cast as the country’s economic “maestro.” Alan Greenspan achieved saint-like status as he led the country’s most powerful peacetime governmental bureaucracy: the nation’s central bank, the Federal Reserve, the Fed. 

Meanwhile, a relatively little-known man from Texas, Henry B. Gonzalez, who had risen to the chairmanship of the House Banking Committee, decided to carry out the responsibility assigned to that committee for overseeing the Fed. The Fed had frequently waved its “independent from politics” flag to ward off congressional intrusion. Now, under an enshrined leader, it appeared safe, except that Gonzalez seemed determined, and in 1992 had made public his suggestions for requiring accountability from Fed officials—who were shocked. The chairman of the “politically independent” Fed sought political help. Greenspan traveled to Little Rock, Arkansas, to talk to the president-elect, Bill Clinton. On December 14, 1992, at a then-secret meeting, Greenspan reported back to Fed officials about his conversation with Clinton, ten days earlier (selections from the transcript of the Fed meeting are in Chapter 10). The powerful Greenspan Fed was determined to stop Henry Gonzalez. 

Despite the low odds of success, Gonzalez would not retreat from carrying out the responsibilities that the U.S. House of Representatives assigned to its Banking Committee for overseeing the nation’s central bank. The Fed was so shrouded in mythology, and seemingly so guarded by its self-proclaimed need to act with absolute independence, that anyone aggressively poking it would be subject to trashing. Admiring politicians and a coterie of Fed watchers who earned their income by interpreting the Fed’s garbled announcements would voice their disgust for anyone intruding on the Fed’s advertised independence. Gonzalez compared his attempt to remedy severe problems at the Fed to hitting a Sherman tank with a stick. Those who knew Henry B., as he was called in his San Antonio district, knew that even later-model combat tanks would not have stopped him. 

Gonzalez was certainly not driven by a need for power or fame. Jake Lewis, who served on the House Banking Committee staff under four chairmen and as a reporter had covered Gonzalez’s unsuccessful campaign for governor of Texas, knew him well. In 1997, Lewis noted that thirty six years in Congress had not changed Gonzalez: “‘A lot of people come here [to Congress] and when they . . . rise to positions of power, you can’t recognize them as the person that came here. But Henry today is, I think, exactly the same person that arrived in 1961.’ ”1 

Gonzalez did not pay homage to rank or power, even his own after he became chairman of the House Banking Committee, which had more than fifty members, in 1989. When I arrived for a second period of service on the committee staff, I was proud to call him “Mr. Chairman.” I had known him in the 1970s. He would occasionally join me in the cafeteria for lunch. He had not changed in 1992. He told me to drop the “Mr. Chairman” and call him “Henry.” When I occasionally walked with him through the hallways of Congress, he would stop and talk to each of the employees, everyone from those cleaning the floors to Capitol Hill police officers. He knew not only many of their names, but also something about their families, and was interested in how they were getting along. When he walked to work along Pennsylvania Avenue, he would stop to speak to those begging and homeless, and there were many on the streets of the District of Columbia. Some of them offered him ideas that he seriously considered. This sincere interest in those far from positions of power carried over to his constituents. He would stay in his office until late at night, reading mail from constituents and writing notes to be included in the replies. One letter written to Gonzalez about banking issues was passed to me for a reply, and I wrote the customary constituent response, something like: “We thank you for your inquiry and we will look into it.” Gonzalez drew an X through this weak dodge and wrote back to me in large letters: “No BS.” 

It would also be a weak dodge to say he was not on the best of terms with the Democratic leadership of the House. Gonzalez, a Democrat, had fought with the Democratic leadership to become chairman of a subcommittee, then to become the Banking Committee chairman, and finally, in a knock-down, drag-out battle, to retain his position as ranking member after he returned in 1998 from an absence due to illness. Shortly after I arrived, I accompanied Gonzalez to a chamber near the House floor. Speaker of the House Thomas Foley (D-WA) approached to speak with him, perhaps, I thought, about attending or holding a fund-raiser. After all, Gonzalez was chairman of the large Banking Committee. (In 2006 it had approximately seventy members and was called the Financial Services Committee.) Since legislation passing through this committee affected trillion-dollar financial conglomerates, the chairman could be a powerful fund-raiser. Before Speaker Foley could talk, Henry told him to “speak to the young man [who was not young] who works for me. He’s an economist.” Henry looked the other way, and Foley said hello to me and left. 

Gonzalez was not afraid of losing. To illustrate this point, he told me that some years ago a friend who had campaigned for him, President Lyndon Baines Johnson, called him and complained. Henry, he asked, why were you the only one who voted against a bill I wanted? Gonzalez replied, “Mr. President, I’m glad to hear from you, but . . .” President Johnson interrupted with a laugh and said that there was no use trying to pressure Henry. He knew that Gonzalez was taking a principled stand.2 The same principled stand prevailed in 1957, the year after Gonzalez’s election to the Texas Senate. Senator Gonzalez holds the record for the longest filibuster in the history of that body, twenty-two hours straight, to defeat eight of ten proposed school segregation bills (another senator, Abraham Kazen, spoke for an additional fourteen hours as part of the same filibuster). Henry told me he kept going even when the lieutenant governor, who had a residence adjoining the Senate floor, appeared in the middle of the night and asked, in a profanity-laden question that made Henry laugh when he recalled the outburst, what it would take to shut him up. The filibuster was successful.3 

As Banking chairman, Gonzalez shepherded passage of the bailout legislation that ended the decade-long savings and loan crisis, which  lasted until the early 1990s. He had shown his skill as a committee chairman. Why not stop there? Why hit a stick against a tank driven by an enshrined national icon: Fed chairman Alan Greenspan? 

A 1997 book review in the Financial Times stated that Greenspan is “widely called without a hint of hyperbole, the most powerful man in the world.”4 Why not follow the wise political practice of many others and join the chorus of admiration? 

No governmental official—including occupants of the White House— had ever received more sustained applause than Alan Greenspan had enjoyed since being appointed chairman of the Federal Reserve. He adorned the covers of numerous newsmagazines and was the subject of an untold number of feature stories in major newspapers across the nation. He received an honorary knighthood from Queen Elizabeth II. An endless stream of superlatives described Greenspan as a wizard, a maestro, a genius. No praise was too extreme or too saccharine to be applied by the media or fawning members of both political parties in the Senate and the House. Almost all the press was favorable. Before the stock market bubble deflated in 2000, criticism was hard to find. Any negative comments that found their way into news stories were invariably balanced with fulsome praise. Most serious students of the Federal Reserve might have argued vigorously against the idea of early sainthood for Greenspan, but there was likely general agreement that the title “wizard” fit if one were trying to describe the amazing and long-running public relations success of Alan Greenspan, who was chairman of the Fed until January 2006, nearly nineteen years. 

The Tank’s Specs 

Greenspan drove a formidable tank, an approximately 23,000-person bureaucracy with immense powers. Among other things, the Fed approves or denies the purchase of competitor banks by trillion-dollar banking conglomerates, controls the nation’s money supply, and manages targeted interest rates. And those are just part of its arsenal. 

The Fed is led by nineteen unelected decision makers: the presidents of each of the twelve Federal Reserve district banks (Fed Banks) and the seven governors at its Washington, D.C., headquarters. The seven governors are nominated by the president and must be confirmed by the Senate. Each governor serves a fourteen-year term.5 They can be fired only through congressional impeachment, which has never happened.6 The Hitting a Tank with a Stick � 5 twelve Fed Bank presidents are internally appointed.7 They are not subject to Senate confirmation, so their views, backgrounds, credentials, and records do not have to pass public examination. The Fed headquarters, in Washington, D.C., is run by the seven governors and is called the Board of Governors, or just the board.8 Twelve of these nineteen officials sit on the Fed’s most important policy-making committee, the Federal Open Market Committee (FOMC). 

20s

Over this bureaucracy presides one of the seven governors, who is the chairman of both central policy-making committees, the FOMC and the Board of Governors. The chairman is nominated by the president and confirmed by the Senate. He serves a four-year term as chairman and can be reappointed and confirmed for additional terms. 

Since 1951 the Fed and its chairmen have held increased power at the expense of a greatly diminished U.S. Treasury Department. In 1951, under the direction of President Harry Truman, the cooperation between the U.S. Treasury and the Fed in controlling the nation’s money supply ended.9 The Treasury gave up all power to issue money, retaining authority over only the Bureau of Engraving and Printing, which it uses to fulfill the Fed’s orders for new currency and coins. Six Fed chairmen have served under that agreement: 

William McChesney Martin, Jr. (1951–1970) 

Arthur F. Burns (1970–1978) 

G. William Miller (1978–1979) 

Paul Volcker (1979–1987) 

Alan Greenspan (1987–2006) 

Ben S. Bernanke (2006–present) 

The Fed’s unbridled lobbying powers can shoot down most of the problems it perceives coming from Congress. During my first term of service on the House Banking Committee staff (1976–1981), I helped the Banking Committee chairman, Henry Reuss, uncover how the Fed used the banks it regulated to lobby against bills the Fed did not like. The lobbying campaign orchestrated by the Fed managed to cripple the ability of private sector and governmental auditors to examine significant parts of the Fed’s operations. That trophy for the Fed’s lobbying success is still on the Fed’s shelf. 

At the time, few members of Congress were willing to incur the wrath of powerful bankers in order to argue for a complete independent audit of the Fed’s books. The need to appease financial interest groups trumped any public interest on that issue. That did not detour Reuss. He told the House of Representatives that this lobbying organized by the Fed would be illegal if the Fed used appropriated funds to organize the private-sector bankers who did it.10 

The Fed did lose some battles. Reuss was victorious in passing a congressional resolution that directed the Fed to regularly and publicly report to Congress on Fed policies, beginning in 1975. 

The Greenspan Fed (1987–2006) was more proficient than its predecessors at lobbying. Its liaison staff could bring the famous chairman to a member’s office. What a wonderful opportunity to have a one-on-one with the nation’s sage, who could offer advice about the economy or his views on undesirable legislation, defined as any that would impair the Fed’s independence, the all-purpose banner that could be waved to shield Fed officials from accountability. The Fed knew that even friendly legislation invites ornaments (amendments) from unfriendly members. At meetings with friendly members, issues such as corruption and lies uncovered by congressional investigations could be quietly trivialized and swept under the Fed’s lumpy rug. Greenspan even visited president-elect Bill Clinton in Arkansas in 1992, reporting back that Clinton’s body language and peripheral comments were consistent with independence for the Fed. (See Chapter 10 for the full story.) 

Any sensitive subject could be handled during Greenspan’s visits to congressional offices. For example, those questioning the Fed’s contention that it was not covered by the Civil Rights Act of 1964 were assured that it fully subscribed to civil rights, even though it might be facing certain problems in that area. 

The Fed could not silence or intimidate Gonzalez. Greenspan and his staff of lobbyists made the rounds in Congress without making any sales that mattered to Gonzalez. The congressman saw to it that the Banking Committee would maintain an arm’s-length relationship with Greenspan and institute actual checks and balances. Gonzalez wanted action taken on issues that were important to the country. The heat generated by the Fed and its sympathizers never caused Gonzalez to stop an investigation. There was an attack against Gonzalez’s ancestry. In February 1995, a national newspaper, USA Today, defended the Fed chairman by attacking Gonzalez with a blatant ethnic slur in its main editorial: “Fortunately, for most Americans, Greenspan and other members on the Fed board tuned out the noise. They rejected the Mexican approach to economics, easy money for fast growth, whatever the consequences. Instead they tweaked up interest rates. Seven times.”11 Greenspan’s actual policy in 1994 was revealed more than five years later. He had informed Congress and the public in 1994 that he was taking a preemptive strike against inflation even though there was little inflation. Now there is a record of what he was secretly and continually telling Fed officials (see Chapter 11). 

The vicious editorial in USA Today was not the only personal attack Gonzalez faced during his rise to the chairmanship of the Banking Committee. Despite these attacks, many legislators stood with him. When the Democrats lost the House of Representatives in 1994 and Henry went from being chairman of the Banking Committee to being ranking member, Congressman Joseph Kennedy (D-MA), a Banking Committee member and a strong Gonzalez supporter, asked Henry B. how he liked being in the minority. Henry laughed and said he had always been a minority. All of us at the meeting laughed; we knew being in the minority would not hurt Henry B. 

Gonzalez could not be swayed by campaign donations. That kind of offer would receive a stiff rebuke. He did not hold fund-raisers for anyone. A group representing large banks once called me because it wanted to hold a dinner to honor the chairman of the Banking Committee; I put the caller on hold and checked with Gonzalez. Without hesitation he said to tell them he did not take free meals. Few other members were as careful to avoid this possible conflict of interest with the oversight functions assigned to the Banking Committee. 

Given the sea of money surrounding political campaigns, Gonzalez’s strict adherence to principle may certainly have seemed eccentric and out of place. But his stand had valuable payoffs for his public service. Overseeing the Fed bureaucracy, which has established barriers to transparency, is very difficult unless the many honest people inside the bureaucracy, who may know of severe problems, trust the integrity of the investigator. Many Fed employees knew about Gonzalez. In one period in 1994 he spoke in the House chamber night after night for weeks while Congress was in session. He was sometimes mocked for addressing the empty room at the end of the day’s regular session. But from feedback we received, it was apparent that, thanks to C-SPAN, people were listening. People came to him because they trusted him. Fed officials quietly blasted him. Someone at the Fed told me that Gonzalez was called an old buzzard and I was called his henchman. Although I was certainly not the only person on the excellent committee staff, I was deeply honored to be associated with Henry.  

Battle Lines 

Much of this book is based on investigations of the nation’s central bank, the Fed, in which I assisted Henry B. Gonzalez. Some material is also from my work with Henry Reuss, a previous chairman of the Banking Committee. Here are some of the severe problems described in the book: 

• The shielding of powerful Fed officials from individual accountability to Congress and the public by falsely declaring—for seventeen years—that it had no transcripts of its meetings 

• The shredding of official source records during the 1990s 

• The leaking of inside information that could be exploited for billions of dollars 

• A policy to manipulate the stock and bond markets in 1994 under cover of a preemptive strike against inflation 

• Faulty bank-examination practices, as revealed by the $5.5 billion sent to Saddam Hussein from a small Atlanta branch of a foreign bank 

• Stonewalling congressional investigations and misleading the Washington Post about the $6,300 in hundred-dollar bills found on the Watergate burglars 

• Billion-dollar loans to foreign countries without congressional authorization 

• Employee theft of more than the officially reported $500,000 in cash from the central bank’s enormous vault facilities 

• Corrupt accounting practices at the Fed’s second-largest vault facility, which stored $80 billion in cash 

• Denying that the Fed was covered under the Civil Rights Act of 1964 and firing women who sued for racial discrimination 

• Retaliation by the Fed against critical reporters 

• Falsified records and shady operations regarding the Fed’s fleet of fifty plus airplanes, including paying for a “phantom” backup airplane at Teterboro Airport How to explain the lies, deceptions, and abuse at the Fed described in this book, given its excellent personnel? The Fed did many activities well with a staff and officials, including Chairman Greenspan, who were predominantly conscientious, capable people.12 I am a former Fed employee, as Greenspan told the FOMC (cited in the acknowledgments). The coexistence of conscientious personnel with the lies and deceptions discussed in this book presents a central question. Why did Fed officials, aided by their staff, behave duplicitously? A major reason for this behavior, advanced long ago, relates to all governmental bureaucracies. The primary objective and rationale of the officials who run a governmental bureaucracy such as the Fed is to preserve and enhance the power and prestige of the bureaucracy, sometimes even if its policies are harmful to the public. One reason for this is that bureaucratic success is measured by power and prestige, not profits. If the Fed’s success were measured by profits, it could appear efficient and very profitable, since the governmental presses print new money on its command. Instead, Fed officials’ legacies and reputations are dependent on what happens to the bureaucracy. 

I call this explanation the “preservation hypothesis.”13 It is borrowed from a famous sociologist, Max Weber (1864–1920), who emphasized the tendency of a governmental bureaucracy to preserve itself: “The individual bureaucrat is thus forged into the [bureaucracy’s] mechanism. They have a common interest in seeing that the mechanism continues its functions and that the societally exercised authority carries on.”14 The preservation of power in combination with secrecy is directly applicable to the Fed: “The pure interest of the bureaucracy in power, however, is efficacious far beyond those areas where purely functional interests make for secrecy. The concept of the ‘official secret’ is the specific invention of bureaucracy, and nothing is so fanatically defended by the bureaucracy as this attitude, which cannot be substantially justified beyond these specifically qualified areas.”15 

From this perspective, how likely is the head of a powerful governmental bureaucracy such as the Fed, with all the acclaim and prestige that comes with such a position, to accept a policy that severely reduces its power and prestige by injuring its reputation? 

Some of Greenspan’s prior views, brought from the private sector, enhanced or conflicted with this preservation motive at the Fed. He experienced serious conflicts between his position as the nation’s top regulator and his long devotion to and association with novelist and philosopher Ayn Rand’s economic views, which strongly rejected regulation, intrusion, and ownership by the government. He could hide these anti government views behind equivocating language or constrain them in garblings, but he could not erase his record as king of the Fed bureaucracy. 

In an austere room at the Fed headquarters, at 20th and Constitution in Washington, D.C., hang the large framed pictures of the past chairmen of the Fed. As cheery as a mausoleum, the room was designed to preserve in dignity the memories of the men who have been at the helm of this great ship. That room is next to the large meeting room for the Fed’s two top policy-making committees. The picture gallery is both a symbol of the importance of the legacy that will follow from the decision making next door, and a shrine to the preservation of the bureaucracy. It also stresses the importance of the officials who will be remembered as kings of the proceedings. 

For many reasons, the motives of Fed officials to preserve its power and prestige may well be in accord with the public interest. Determining just where this effort crosses the line and begins to harm the public interest can be an especially hazy, or even nonexistent, task for Fed bureaucrats, who have an incentive to form a united front against criticism and close accountability. They are joined by a large number of admirers and protectors, many of whom distrust other governmental bureaucracies that operate with insufficient congressional oversight, but grant a special exemption to the bureaucracy handling the nation’s money supply. 

The account presented in this book will, I hope, help eliminate that exemption. Free and informed public coverage aided by effective congressional oversight from legislators such as Henry B. Gonzalez is essential to diminish actions against the public interest by unelected governmental officials. 

Gonzalez’s efforts to turn the lights on at the Fed were not politically partisan. The bipartisan desire of legislators for transparency was evident in Greenspan’s remarks at secret Fed meetings. During his testimony before the Banking Committee on October 13, 1993, Greenspan apparently thought that Republicans would protect him, but became alarmed when Republicans started asking penetrating questions. Former Banking Committee chairman Jim Leach (R-IA) had written a statement for the hearing record, describing how the Fed should be reformed: “The issues of greater transparency of FOMC decision making as well as greater budgetary openness can no longer be ducked.”16 At a secret meeting, Greenspan warned the FOMC: “Jim Leach, of course, was the one who concerned me the most because his view is that there will be some markup of some form on some legislation.”17 Greenspan was also concerned with another Republican member of the Banking Committee. He called him “nonrational.” He told the FOMC that Congressman Toby Roth (R-WI) was questioning him about the existence of Fed budget records.18 Actually, Roth’s primary concern, as he explained to Greenspan, was why large parts of the Fed should be off-limits to governmental auditors, as stipulated in a 1978 law. Roth also referred to legislative efforts by Congressman Lee Hamilton (D-IN, who in 2004 co-chaired the National Commission on Terrorist Attacks Upon the United States, also known as the 9/11 Commission) to require the Fed to publish its budget in the official Budget of the United States Government and to include details Hamilton said were missing. When Roth asked why the Fed budget had not been published, Greenspan replied that it had a sixty six-page budget. During a secret FOMC conference phone call, Greenspan attacked Roth: 

For example, there was Toby Roth out there, a Republican, who was saying that we don’t publish our budget. I pick up a blue [document, a] budget of 66 pages and I look through it and I say: “This is the most detailed budget of expenses I have seen of a federal agency.” Did Toby Roth say to me “Oh, I didn’t know [about] that. May I take a look at it?” He went on as though I had not made a single remark. What we are confronted with here is a very peculiar degree of non-rationality. It’s not irrational; it’s nonrational. And I’m very much concerned that in the areas where it really matters to us we can become very vulnerable if we mishandle how we respond to this particular problem that we have with respect to these transcripts.19 

Gonzalez was awarded the 1994 Profile in Courage Award at the Kennedy Library. He was recognized for launching congressional investigations into the corruption of the savings and loan industry and for probes into the sale of U.S. arms to Iraq before the Gulf War in 1991. Caroline Kennedy Schlossberg noted his “well-known insistence on ethical conduct, tireless pursuit of the truth, respect for the Constitution, and opposition to powerful special-interest groups.” Gonzalez told the audience: 

In my time I have had the honor to be vilified for standing up against segregation. I have had the privilege of being a thorn in the side of unprincipled privilege, and the great joy of being demonized by entrenched special interests. I have had the special pride of seeing hard jobs completed: the great civil rights laws; the cleanup of corruption in the savings and loan industry; the enactment of Federal laws that help educate the poor, care for the sick, eradicate disease, and house the people. And I have endured the impatience and humiliation that comes along with sometimes falling short of the goal.20 

Gonzalez was then leading the oversight investigations of the Fed.

Chapter 2 

The Burns Fed 

Price Controls, Inflation, and the Watergate Cover-up with a Distinguished Professor at the Helm 

The Professor from Central Casting 

Arthur Burns (1904–1987) dressed like a learned professor from central casting, complete with a tweed suit and pipe. The chairman of the world’s most powerful central bank, along with his security detail, was said to arrive at embassies in Washington, D.C., for meetings or formal social gatherings in his unassuming car, fit for an ivory-tower professor, while other central bankers and finance ministers playing the role of diplomats arrived in limousines. 

At House Banking hearings, an out-of-place professor might have been expected to humbly share his wisdom and its limitations and to be honored to hear from the people’s representatives. In reality, Burns was a tough old bird who would not alter his position an inch. Magisterial, he rained condescension on questioners like a prickly professor having to answer irritating questions from unprepared undergraduates. 

Unlike Greenspan, who would assume some of the same erudite style, Burns had been a professor, an acclaimed scholar with a long, distinguished academic career. He began his academic career at Rutgers University (1927–1930), where one of his students was future Noble laureate Milton Friedman. Burns spent thirty-five years (1934–1969) as a professor at Columbia University, where Alan Greenspan was one of his students.1 Many of the terms still used to describe business cycles were developed by Burns and Wesley C. Mitchell, his collaborator and former teacher.2 It is evidence of the great public esteem accorded Burns’s advice that his counsel, like Greenspan’s, was solicited by presidents from both political parties. Burns served as Fed chairman (1969–1978) during the Nixon and Ford administrations. He served in the presidential administrations of John Kennedy, a Democrat, and Republicans Dwight Eisenhower, Richard Nixon, and Ronald Reagan. 

Many would agree that he had the right to assume a haughty style, even if some legislators found that it impaired communication. His style may have shielded him from questions about basic problems at the Fed. 

Inside the Fed, Burns assumed a similarly commanding style that fostered strict censorship of its large staff of economists, a policy that, as Business Week reported in 1979, continued when his successor, G. William Miller, became Fed chairman: “‘Burns ran a one-man show. As far as he was concerned, he was the monetary policy in the Federal Reserve System,’ observes Denis S. Karnosky, who recently resigned as vice-president of research in St. Louis after more than 12 years at the Fed bank.”3 The article goes on to state that “the pressure for non-controversy is being applied in varying degrees throughout the system and that the disarray surfacing in New York and Philadelphia [at the Fed Banks in those cities] is spreading.” In the New York Fed Bank, “many economists charge that bank officials alter the conclusions of their research to conform to what those officials think will please the Washington Fed staff and Paul A. Volcker, president of the New York Fed. Says one New York economist: ‘The tone of every article is written to order.’ ”4 I relate my experience with censorship at the Kansas City Fed in Chapter 9. 

Lobbying and Diversionary Performances 

The Fed went to elaborate efforts to influence new members on the Banking Committees as a way to circumvent the “unfriendly” chairmen. For example, Burns, frustrated by House Banking chairman Wright Patman (committee chairman, 1963–1975), held many breakfasts with the numerous new members. Patman used to joke that Burns’s breakfasts were affecting the price of egg futures.5 

The lobbying campaign ran into a snag engineered by a committee staff member. Burns was incensed that an economist on the staff of House Banking advised members, especially Chairman Henry Reuss (who succeeded Patman), to legislate a requirement that the Fed periodically report to Congress. The culprit was the late Robert E. Weintraub, who gave up a tenured position as professor of economics at the University of Calfornia, Santa Barbara to join the staff. He had been a marine in the South Pacific during World War II and was a University of Chicago PhD who campaigned for slow money growth. Bob persuaded members of the need to mandate Fed reports at public hearings. He also spoke with members of the Senate Banking Committee who had been contacted by Burns. Burns lobbied hard to stop this intrusion on the Fed’s “independence,” but in 1975 a House resolution initiated the Fed’s semiannual hearings at the Banking Committees.6 

Burns, vigorously waving the Fed’s mythical flag of independence, was very upset at being the first Fed chairman to be formally invited, by force of a congressional resolution that would later be incorporated into a law, to regularly testify to Congress about what the Fed was doing. Weintraub liked to describe one particular reaction to his work. After coming around a corner at a White House reception, he found himself alone with Burns, who, according to Weintraub, dropped the (expletive deleted) bomb on him and left. 

Burns’s required appearances before the House Banking Committee always attracted overflow crowds and wide TV coverage. At long last there was a slight lifting of the curtain of secrecy. Burns was expected to be revealed as the exalted wizard behind the curtain, deigning to explain some of the knobs and controls of his policy apparatus. The dog and pony shows fell far short of this expectation. 

Burns sometimes gave answers as if he were instructing the legislators, lecturing in his nasal monotone. Such belittlement discouraged critical questions from members who did not want to be part of a student-teacher performance on national TV. Each of the approximately fifty House Banking Committee members was allotted five minutes to question the Fed chairman. Burns’s answer might consume the full allotment, preventing a follow-up question. Generally, the exchanges contained little or no content relating to Fed policies and operations. Burns told Senate Banking chairman William Proxmire: “I would like to see interest rates where they are, or even come down, but they may have to go up.” Proxmire responded “as an overflow crowd in the hearing room erupted in laughter: ‘I keep nailing that custard pie to the wall.’ ”7 

In the 1970s, technical details about Fed policy did not make the evening news on the major networks; a report on the Fed hearings was sometimes reduced to pictures of a cash-register drawer opening to signify that the central bank had something to do with money.8 Veteran NBC reporter Irving R. Levine would say, “This is Irving R. Levine,” in his distinctive voice. Shown against the backdrop of the empty chamber where the House Banking Committee held its hearings, he read his report from large cards held by an assistant. In the days before cable, his success depended in large part on his short report being selected for the evening news. If the renowned Fed chairman contradicted someone else in the government, that was the kind of confrontational tidbit that could draw attention in a short sound bite. These selected “news” items shed little, if any, light on problems at the Fed. 

An Inconsistent “Conservative” 

A biographer wrote that when President Eisenhower nominated Burns as chairman of the Council of Economic Advisers, “Republicans worried over the appointment despite Burns’ economic conservatism. He had remained a Democrat throughout his academic years. His tweed suit and professorial manner reminded party stalwarts of the New Dealers they had worked so hard to oust.”9 

Burns’s record, including information on transcripts of the Fed’s then secret meetings, cannot be readily tagged with a convenient label such as “economic conservatism.” Burns stood firm against giving away interstate control when pushed to do so by House Banking chairmen Wright Patman and Henry Reuss or when subjected to tough questioning from members who wanted lower interest rates. Interest-rate management was central to the Fed’s policy. Fed chairmen since 1951 had stood firm on this front; otherwise, short-term interest-rate policy would be subject to congressional pressures.10 Conservatives and many others believed this was a necessary stance for central banks to take in order to prevent rapid inflation. Yet it was clearly inconsistent for Burns to publicly appear to protect the Fed from these attacks while thrusting what conservatives saw as another dagger into the heart of free markets: wage, price, and dividend controls.11 

FOMC transcripts from 1972 indicate that Burns advocated wage and price controls and even controls on dividends.12 House Banking chairman Patman, a leading liberal Democrat from Texas, also advocated wage and price controls. In an effort to reduce inflation, Richard M. Nixon (president, 1969–1974) introduced wage and price controls in 1971. At FOMC meetings in 1971 and 1972, Burns told Fed officials that he strongly supported these controls and had been in favor of them before Nixon suggested that they be used.13 The Nixon administration’s wage and price controls self-destructed in 1973 because of rising inflation.14 Four years later, Burns told the Senate Banking Committee that the country needed an “incomes policy,” and he called on the federal government to cut in half the pay increase for governmental employees.15 

While Burns was advocating fighting inflation with price controls and an income policy, he also was using the Fed’s assigned ammunition to stimulate the economy. Tape recordings from President Nixon’s office reveal a sustained effort by administration officials to pressure Burns to stimulate the economy with low interest rates by gunning the money supply right up to the November 1972 election.16 Although administration officials were not always satisfied, and Burns may have acted solely on his own best judgment, the record is clear. The Burns Fed accelerated the growth of the money supply before the election and slammed on the brakes after the election.17 Two Fed governors warned the distinguished chairman against fueling a more rapid inflation.18 Price increases from a rise in the price of oil affected inflation in the early 1970s.19 The continued rise in prices was nurtured by the Fed’s fast money growth, earning the Burns Fed a low grade for its policies.20 

By 1980, short-term interest rates targeted by the Fed were near 20 percent and inflation surged to 13.5 percent.21 Burns had blamed inflation during his tenure on the Vietnam War, “oversized” wage increases in the steel industry, “oversized” wage increases by unions, and Congress (which raised the minimum wage and increased Social Security taxes). 

Burns disliked the monetarist explanation put forward by Milton Friedman, who viewed fast money growth as the prime reason for sustained inflation. Burns came under wider political fire late in his term when he sought to raise interest rates to slow down money growth, which had ballooned far above the Fed’s targets.22 Using an analogy I heard him employ several times, Friedman compared instigating fast money growth while applying price controls to trying to hold down a cover on a boiling teapot. 

The Kidnapping Excuse for Secrecy 

The culture of secrecy at the Fed could be both vivid and comical. House Banking chairman Patman once asked Burns for the salaries of Fed officials below the rank of the top officials, whose salaries were already made public.23 Patman wanted the names and salaries of everyone in the Fed making more than $20,000 a year. Responding to Patman on June 25, 1974, Burns requested that Fed officials’ salaries be kept secret, lest they be kidnapped and robbed: “In recent years, as you know, there have been numerous unfortunate incidents, such as kidnappings and robberies, perpetrated on individuals in the United States.”24 

Finally, Burns reluctantly allowed that his reply would “encompass approximately 1,000 employees,” asking “that the names of the employees we will be supplying be maintained solely for your personal use and not made available to others.” This subterfuge to prevent having to reveal public sector expenses seemed so obviously drawn from whimsy that it served only to highlight the Fed’s arrogance. More fundamentally, that arrogance and secrecy were means to preserve power, as described in Chapter 1. 

A Massive Conflict of Interest How could the secretive Fed bureaucracy survive in a democracy? In part because the Fed was regulating the very people charged with regulating it, a massive conflict of interest that still undermines Fed operations. House Banking chairman Patman’s response to this problem is directly relevant to the type of corporate scandals uncovered after 2000 and the attention given to reducing conflicts of interest in corporate boards of directors. Patman directed that a study be made of the directors of the Fed Banks. Patman died in 1976, just before the final copy of this study—Federal Reserve Directors: A Study of Corporate and Banking Influence—was sent to the printer.25 A new cover letter was prepared for the next House Banking chairman, Henry Reuss. 

The study contained more than a hundred pages of diagrams of Fed Bank directors’ corporate and banking connections. It examined the affiliations of the 9 directors in each of the 12 Fed Banks (108 directors), and the 161 directors at the branches of these banks, for a total of 269 directors. It showed that 73 of the 108 Fed Bank directors “are either now, or have been, officers, directors, or employees of financial institutions.”26 They were shown as being part of “interlocking directorships” that included the top one thousand industrial concerns and one hundred multibank holding companies. Reuss wrote in the introduction: “The survey of the 269 directors of the district bank and branch boards indicates only minimal representation for small business and only a scattering of input from the academic community. . . . It is clearly evident that the Federal Reserve System is dominated by a very small universe of private corporations” (emphasis added).27 

Extracting the Minutes 

After the report was issued, Reuss was convinced that the minutes of the meetings of Fed Bank directors should not be secret. He asked Burns for the minutes of the directors’ meetings. The request was met with the same defiant cordiality and feigned surprise that greets many requests for Fed records, a response similar to that received when requesting documents from some foreign governments. 

The battle for the records pitted Burns against the new House Banking chairman. Although Reuss was a scholarly lawyer who loved academic discussions of different views of policy issues, he also had a magisterial style that could be quite confrontational. Burns’s arrogance was no threat to him. This may explain why Burns shed his public persona as a tough old bird when meeting privately with Reuss. Reuss found a self effacing professor pleading with him most pitifully to do something good for the country—and the central bank—by not asking for Fed records. Upon hearing of this tactic after the first meeting, the House Banking staff feared Reuss’s magisterial style would be reduced to congenial accommodation. In staff-drawn cartoons of forthcoming meetings, the two chairmen sat at opposite ends of a very long table to prevent Reuss from giving away the store. Although he found it difficult to deny this humble Fed chairman, Reuss, an intelligent, well-educated legislator with high principles, would not relent from demanding the secret records. 

On September 15, 1976, Burns responded to Reuss by affirming that he too wanted more diversity on the boards of directors, but assured Reuss that since the boards did not have much authority, he and Reuss should not waste each other’s precious time reading minutes: “Neither of us will reach our common goal, however, by examining pages and pages of minutes of Directors meetings. . . . In any event, your and our objectives are the same, broader representation on the these Boards, and we must not let debate cloud our thinking on this issue” (emphasis added).28 

Reuss replied eight days later: “So there will be no misunderstanding, I request that your office assemble the minutes . . . and deliver these documents to the Clerk of the Banking, Currency and Housing Committee . . . by 5 p.m. on October 15.”29 Burns did not meet the deadline. By November 12, Reuss had agreed to reduce the workload of copying five years’ worth of minutes to the years 1972, 1974, and 1975. Burns finally agreed, adding, in a handwritten note, “P.S. Your press release after our talk was very helpful I appreciate it. A.”30 

Behind the scenes, the feelings at the Fed regarding greater transparency were not so cordial, as revealed in the FOMC transcripts that Burns left (upon his death, in 1987) to the Gerald R. Ford Presidential Library on the University of Michigan campus. The archivists of the National Archives and Records Administration only lightly edited the transcripts. St. Louis Fed president Lawrence K. Roos is reported as saying: 

I would also think that if this involves a lot of work, which it will, needless work, that someone on Mr. Reuss’ Committee, a friendly individual should know what we’re being called upon to do. Because I think this can be used against Reuss if we react intelligently and as I see it in the St. Louis case, it’s appalling how skimpy or meaningless our minutes are, I’m sure we did this with great wisdom knowing that a man named Reuss would ask for them. The minutes are really terribly shallow. Tell nothing. (emphasis added)31 

Finally, on December 20, 1976, after six months of letters and negotiations, the minutes were shipped; a handwritten note on Burns’s cover letter to Reuss read, “Merry Christmas and Happy New Year to you and your family, Arthur.” Reuss did not agree to one of the stipulations in Burns’s lengthy letter. This “essential assumption” was that there be no public disclosure. The Fed chairman raised all manner of potentially dire consequences as reasons to keep the public from knowing what the central bank district directors were doing. Burns even used the pretense that the Fed Banks were more like private corporations than part of a governmental bureaucracy responsible to the public: “They [the minutes] reflect, as would the minutes of any corporate board meetings, the directors’ bona fide efforts to fulfill their fiduciary obligations through the candid exchange of views and through review of significant corporate issues.”32 

After reading the material, the staff (including the author) telephoned Reuss, who was in Milwaukee, his home district. Reuss asked the staff to assist in writing a speech that he would deliver on the House floor and to make the material available to the press.33 He delivered a floor speech entitled “What the Secret Minutes of the Federal Reserve Banks Meetings Disclose.” Reuss’s investigation of the minutes led to the passage of the Federal Reserve Reform Act of 1977, which brought Fed Bank directors within the scope of federal conflict-of-interest laws. 

Murder at the Richmond Fed 

and Vacuumed Minutes 

One important deficiency of the boards of directors’ minutes was their failure to include details. They generally followed the above-cited practice from an official in the Fed bureaucracy: “Tell nothing.” Reuss called attention to vacuumed minutes that reported the murder of a guard by another guard at a Fed bank: “VII. Deletions and Failure To Provide Important Details In The Directors’ Minutes . . . (For example) After a murder and three related shootings inside the Richmond Federal Reserve Bank, there must have been quite a discussion at the next board of directors’ meeting. However, the minutes of March 9, 1972, at Richmond report simply: ‘Mr. Heflin reported on the incident last Tuesday, when one of the Bank’s guards shot and wounded four other members of our Security force, one fatally. He said that the other three had been released by the hospital.’ ”34 

The murder of a Fed guard and related events are a national-security problem involving the safety of the immense amount of currency and coins the Fed receives from the Bureau of Engraving and Printing. The Fed also examines and stores currency and coins for the entire banking system. Surely a threat to any part of this system would rate more than a two-sentence summary. 

Despite this vigorous vacuuming, there was enough material in the hundreds of pages of minutes to reveal, after many weeks of combing, very disturbing facts that led to the discovery of the Fed’s part in the Watergate cover-up. 

Burns, the Burglars, 

and the Post 

Burns, a top Nixon administration official, appeared to have escaped the 1972 Watergate scandal with his honor and prestige intact. Burns’s directive to keep the “System” from getting involved blocked congressional investigations into the source of the $6,300 found on the Watergate burglars. It was also used as the basis for issuing false or misleading information to the Washington Post, according to the documents shown here. 

Five burglars, acting on instructions from the Nixon administration, broke into the Democratic National Committee offices in the Watergate Office Building, part of a large hotel-apartment-office complex overlooking the Potomac. They were arrested at approximately 2:30 A.M. on June 17, 1972.35 Six thousand three hundred dollars in new hundred-dollar bills, numbered in sequence, was found on the burglars. The Philadelphia Fed Bank notified the Board of Governors about some of this money on June 20, three days after the Watergate break-in. The following day, Burns sent a directive to all the Fed Banks. The existence of the directive and Burns’s reported desire to keep the Fed from getting involved were revealed in the minutes of a Philadelphia Fed Bank meeting on June 22, 1972 (Fig. 2-1). In the minutes, a Fed official reports: “Mr . . . said that Chairman Burns doesn’t want the System to get involved and issued a directive to all Reserve Banks on June 21, which said in effect that the System was co-operating with law enforcement agencies but should not disclose any information to others.” 

Two days after the Watergate break-in, Senator William Proxmire, chairman of the Financial Affairs Subcommittee, specifically requested that Burns report to Congress about the $6,300 rumored to have been paid to the Watergate burglars.36 Burns replied in a letter dated the same day: “We at the Board have no knowledge of the Federal Reserve Bank which issued those particular notes or the commercial bank to which they were transferred.”37 

What did the Board of Governors staff know forty minutes later? According to the Fed’s annotated “Chronology Listing of the Events of the Watergate Matter as they Relate to the Federal Reserve System,” forty minutes after the Burns’s reply to Proxmire was sent, the Fed contacted the FBI (Fig. 2-2). The Fed was told “of two Federal Reserve offices that had issued currency notes in the Watergate matter.” One day later, June 20, 1972, the Fed’s “Chronology” records: “Federal Reserve Board staff [was] informed that . . . ten notes had been shipped by the Reserve Bank to Girard Trust Company in Philadelphia on April 3, 1972.” Later the same day the staff at the Miami Fed facility “advised the Board they had given the FBI the following information—seven $100 notes listed by the FBI had been paid by Miami to Republic National Bank of Miami on April 19, 1972.”38 

Several notations in the “Chronology” indicate that the FBI had asked the Fed not to disclose this information to anyone. Henry B. Gonzalez observed twenty-one years later that officials of the FBI may well have been part of the cover-up: “The Acting Director of the FBI, who may have been given the information, testified that he burned some Watergate files.”39 Gonzalez was referring to L. Patrick Gray (1916–2005). Gray was acting FBI director for less than a year (1972–1973). On June 26, 2005, three days before his death from pancreatic cancer, Gray was interviewed on ABC’s This Week by George Stephanopoulos. Gray said he was called to the White House while he was the acting director of the FBI and given documents that had been found in the safe of a Watergate conspirator who was later convicted. Gray said White House counsel John Dean assured him that the documents were not Watergate related and instructed him in the presence of another high White House official, John Ehrlichman, to make sure that they never saw the light of day. Gray said that at a later date he retrieved these documents, which he had placed in a FBI safe, took them to his Connecticut home, and burned them in the fireplace. 

Five days after the break-in, June 22, 1972, at a board of directors meeting of officials at the Philadelphia Fed Bank, it was recorded in the minutes that false or misleading information about the $6,300 had been provided to a reporter from the Washington Post (see Fig. 2-1, under “Other Matters”). Bob Woodward told me he thought he was the Washington Post reporter who had made the phone inquiry. The reporter “had called to verify a rumor that these bills were stolen from this Bank,” according to the Philadelphia Fed minutes. The Philadelphia Fed Bank had informed the Board on June 20 that the notes were “shipped from the Reserve Bank to Girard Trust Company in Philadelphia on April 3, 1972” (Fig. 2-2, item 8). The Washington Post was informed that thefts had occurred, but was “told they involved old bills that were ready for destruction” (Fig. 2-1). Three people had been named in a complaint filed before U. S. Magistrate Richard A. Powers with “the abstraction on or about June 29, 1971, of $900,000 in U.S. Federal reserve notes of $100 denominations from the Federal Reserve Bank of Philadelphia where they were employed as clerks in the Currency Verification and Destruction Unit.”40 The Washington Post and the chairmen of the congressional banking committees were not given information about the trail of the funds back through the Girard bank so that the source or sources could be determined. 

Despite efforts by Senator Proxmire and House Banking chairman Patman, Burns steadfastly refused to supply information given to the Fed about the $6,300 found on the Watergate burglars. Burns wrote that the Fed was cooperating with the U.S. Attorney, adding: 

None of us here at the Board feel that any good purpose would be served by going back a third time to the U.S. Attorney. 

Your charge that the Board “is covering up for someone high in the Executive Branch” is deeply resented. This charge is totally without foundation. (see Fig. 2-3) 

Proxmire responded: “In fact, the situation is even worse than I thought. I now find that the U.S. Attorney did not ask in any formal way that you withhold the information from me and that in addition neither you nor he made any independent judgment that the information I sought could impair the investigation or harm the right of a defendant” (see Fig. 2-4; emphasis added). 

Nearly two decades later, Gonzalez referred to Burns’s denial of information in his opening statement to Fed chairman Alan Greenspan and sixteen other Fed officials who were congressional witnesses: 

The Acting Director of the FBI, who may have been given the information, testified that he burned some Watergate files. The Nixon administration asked him to limit the FBI’s investigation of the burglars’ financing on the grounds that further inquiry would “uncover CIA assets and sources.” Gosh, that sounds familiar. [Gonzalez was referring to the same type of warnings he received in the 1990s in an effort to stop his investigation of $5.5 billion in loans sent to Iraq’s Saddam Hussein.] What was the Federal Reserve’s role in this coverup? Did the Federal Reserve deliberately obstruct the Congress and the public?41 

The Watergate scandal resulted in the criminal convictions of more than fifty people and in guilty pleas from nineteen corporations. Many administration officials had approved, taken part in, or later tried to cover up activities of the White House Special Investigation Unit, known as the “Plumbers” because they were supposed to fix leaks of information, which included the five Watergate burglars. The administration orchestrated and later tried to cover up other illegal activities, which were brought to light along with the Watergate revelations. These activities included “dirty tricks” against Democratic Party candidates running for election. The Plumbers had tried to enter the Democratic National Committee offices a number of times before they were caught.42 Eventually the scandal led to Nixon’s resignation, on August 9, 1974; he remains the only president who has resigned. 

The Burns Fed not only kept the Fed from getting entangled in the Watergate cover-up, which the Fed’s actions had assisted, but also allowed false statements about bills the Fed knew were issued by the Philadelphia Fed Bank to stand uncorrected. By blocking information from Congress and issuing false information during a perilous governmental crisis, the Fed imposed huge costs on a public already lacking the information to hold Fed officials accountable. Had the deception been discovered, the Fed chairmen following Burns might have been forced to rapidly implement transparency measures in order to restore the Fed’s credibility. That would have reduced or eliminated many of the lies, deceptions, and corrupt practices that are described in this book. 

Burns Fails the Audition; His 

Replacement Is Delayed by 

an Iranian Bribe Scandal 

When Jimmy Carter was elected president (Democrat, 1977–1981), the Burns Fed was in the process of raising its short-term interest-rate targets in an effort to control the rapid money growth it had engineered.43 The plans for more interest-rate increases drew criticism from House Banking chairmen Reuss and Proxmire. Although “Proxmire conceded that the recent rise in interest rates had been necessary,” there was fear that further increases would cause serious harm. Reuss said that if Burns actually carried out this policy of raising interest rates, “the economy would be thrown in another recession.”44 Carter’s chairman of the Council of Economic Advisers, Charles L. Schultze, warned that the interest-rate increases could weaken the economy. Hobart Rowen reported bitter feelings between Proxmire and Burns that were “thinly disguised” when Proxmire told Burns at a November 9, 1977, hearing: “We may be saying Auld Lang Syne, and in a way I hope we are, but we’ll certainly miss you.”45 

Burns was not reappointed. It was unusual, even sad, to see the distinguished Burns all alone in the hallway of the Rayburn Office Building, at the House of Representatives, where only a few weeks before his every appearance on Capitol Hill was accompanied by a cadre of staff and guards. Burns finished his governmental career as ambassador to Germany (1981–1986). He died in 1987 at the age of eighty-three. 

Carter nominated G. William Miller to be Fed chairman in 1978. Vice President Walter Mondale had conducted a secret search for a new chairman so as not to embarrass Burns. Miller’s confirmation was delayed because of a widely publicized scandal at the company he headed, Textron. The Senate was investigating charges that executives of Bell Helicopter, a division of Textron, had made “concealed foreign payments” to officers of the Iranian army in order to sell them helicopters. The potential illegality involved the Securities and Exchange Commission requirement to report questionable payments. Miller testified he did not know that General Mohammed Khatemi, commander of the Iranian Air Force, owned a sales agency that received a $2.9 million commission on the sale of 500 Bell helicopters to Iran in 1973. Miller was then confirmed. The Justice Department then convened a grand jury to investigate charges that some Textron officials had obstructed the 1978 confirmation hearings. This action generated further adverse publicity. Neither episode appeared to impede Miller’s job performance.46 

Miller served only a short time, 1978 to 1979, before becoming secretary of the treasury. Although he was not well versed in monetary policy, he was instrumental in developing legislation in 1980 that required all private-sector banks to adhere to nationwide Fed-imposed reserve requirements—required cash reserves for checking deposits. The legislation also allowed all domestic depository institutions to purchase Fed services such as check clearing and Fed loans to banks. The Fed chairmen were now at the helm of an even more powerful bureaucracy, but one saddled with a big problem: inflation, which in the first quarter of 1980 reached an annual rate of more than 17 percent. 

After Stopping Rapid Inflation, 

Volcker Is Undermined and Replaced 

Paul Volcker, the new Fed chairman, was described as “a serious-minded, balding cigar-smoking man who, at 6 feet 7 inches, towers over most of those around him,” “a Democrat who served as under secretary of the treasury for monetary affairs during the Nixon administration,” and someone “regarded as skilled and highly competent by liberals and conservatives.”47 

Volcker took a large reduction in salary when he was promoted from president of the New York Fed Bank to Fed chairman. His annual salary, which had been $110,000 as president of the New York Fed Bank, was reduced to $57,500 as Fed chairman. This ridiculous pay scale was a product of the muddled organization of the Fed: Fed Banks could pretend to be private companies when it was convenient for them to do so. This pretense allowed them to reject the lower pay scales in the federal government. Twenty-four years later, in 2003, the same pay-scale embarrassment continued: the New York Fed Bank president was paid $310,000 a year, and Fed chairman Alan Greenspan was paid $171,900. 

Volcker, who served two four-year terms as Fed chairman, steered a Fed policy that substantially reduced inflation before Alan Greenspan became Fed chairman, in 1987.48 Prices for consumer goods and services that had risen more than 13 percent in 1980 dramatically fell in Volcker’s second term. Prices rose slightly more than 1 percent in 1996. 

Volcker hit the ground running. He held a news conference with an astounding message on stopping inflation, word of which “filtered through receptions Saturday night and into breakfast sessions Sunday morning” at the annual American Bankers Association (the largest banking trade association) convention in New Orleans; “the bankers expressed strong support.”49 

The Fed would now concentrate on controlling the money supply rather than interest rates, a view that pleased the group of economists called monetarists. “Miracles never cease,” said Beryl Sprinkel, a monetarist who served in the Reagan administration in a position previously held by Volcker, undersecretary of the treasury for monetary affairs. Sprinkel later became the chairman of the Council of Economic Advisers.50 

The Volcker Fed’s remedy of slowing money growth was the major cause of a double-dip recession that saw a peak unemployment rate of 10.8 percent in 1982. This was the highest unemployment rate since the Great Depression.51 Volcker’s slower money-growth policies did not please some people in the Reagan administration. 

The Reagan administration’s method of removing Volcker was an example of political manipulation of the “independent” Fed. Volcker had been outvoted on February 24, 1986, by Reagan appointees to the Board of Governors. The majority rejected an increase in the interest rates on loans that the Fed made to banks. Volcker reportedly said good-bye and abruptly left the meeting to prepare his resignation. The rebellious Fed governors, called “the gang of four,” later backed down, but the unwelcome mat for the man whom James Baker (White House chief of staff and close adviser to the president) called the “known Democrat,” as if the Fed chairman were a subversive, was never removed.52 

Volcker offered his resignation at the end of his second term; he was pointedly not asked to remain. According to Bob Woodward: “Howard Baker [White House chief of staff after James Baker] called Jim Baker to report that Volcker didn’t want to stay. Jim Baker was delighted. ‘We got the son of a bitch,’ he told a New York friend.”53 President Reagan, in a customary short pink-slip announcement, said he accepted Volcker’s decision “with great reluctance and regret.”54 He nominated Alan Greenspan, who two months earlier had been informally notified that this would happen. 47s